How to Fix the Economy

Alan Ahearne is today’s contributor to the Irish Times series: “Income Tax Rates Will Need to Rise.” (As usual, headline does not give full flavour of the article.)

The fiscal plan of Fintan O’Toole is also worth reading: “Government Reaction to Crisis Needs to be Credible.” A longer version of this article would have been even more interesting, in which the economic consequences of the pay element of his plan might be explained in more detail.

7 replies on “How to Fix the Economy”

Fintan O’Toole’s interesting piece suggests that the reduction in stamp duty announced in the Budget be rolled back and the 9% rate re-imposed, and argues that this would raise revenue. This morning’s Irish Independent leader makes the precise opposite argument – stamp duty should be scrapped, at least for a few years.

I think most observers believe that stamp duty revenue would react negatively to a rate increase in current circumstances, and that reliance on feast-or-famine taxes has contributed to the current fiscal crisis. A more orthodox base for property tax, unrelated to volatile transaction volumes and prices, would be better than Fintan’s proposal. There must be a fair chance that a stamp duty increase would actually cut revenue, as well as inhibiting property transactions necessary for de-leveraging.

A further tax on second homes seems to be all the rage the last few days. I imagine the Commission on Taxation is thinking about the options for first homes!

It would be useful to have clarity on whether Fintan O’Toole wants a ceiling of 80K for individual or household incomes. If it is the former, a two-earner household faces a ceiling of 160K. The gap between single-earner and two-earner households would represent a significant source of social tension?

One thing is for sure: if we were to run into the sort of sovereign liquidity crisis that Alan mentions in his piece as being a risk, and if as a result we had to get some sort of financing from our European partners, our salaries would be cut down to average European levels, and beyond, pretty sharpish.

I agree with Colm on the idea of property tax as a planned and stable as well as providing an income you can forecast.

certain things should NEVER have been paid for out of income tax (william pitt has a lot to answer for those decisions in 1799!).

Why are the fire brigade financed out of income tax receipts? They are a purely land/property based service, schools should be paid for by their local catchment area, the school in dublin should not be financed by a person in leitrim.

regarding higher taxes, i don’t know where we stand on the laffer curve but a massive increase would incentivise a portion of the bill to hide.
34% of the workers in this country pay NO TAX (according to brian lenihan), yet what amount of cost do they incur to the state?

if anything, a way of easing the inevitable wage deflation is to ease income taxes. And although I don’t write the cheques, I have an issue with the leader of this country being paid more than the president of the USA.

Dr. Alexander Butchvarov (head of structured finance Merrill Lynch worldwide) gave a talk to CFA Ireland and he said that during a financial crisis the govt. deficits generally spiral up c. 86% but not due to bailouts, due to a collapse in tax receipts.

with lower wages higher income tax will (at best) stem the flow, not fix it. Land and property on the other hand is in fixed supply – sean dublin-bay loftus need not respond – and therefore it can be taxed according to the budget required.

I agree with Colm: Residential stamp duty now accounts for approximately 1 per cent of total government revenues. Furthermore it inhibits anyone selling a home that was purchased less than five years ago for the purposes of trading up, unless they happen to have the stamp duty amount lying around in a bank account somewhere. This is because the last time house prices were at present levels was autumn 2005 and you would have had to have bought this house in early 2005 to ensure the 7% capital gain needed to fund the stamp duty.

As regards a property tax, some practical questions arise in relation to the intended payer: Because (partly at least and ironically) of stamp duty impeding the market, many who have second properties do so because they have become hitched in the last two years and are unable to sell the property. A property tax will therefore tax unwilling holders of property. Unless it exempts recent payers of stamp duty it will impose a double penalty for, conceptually, the same kind of tax. It could be politically explosive, much more so than RPT.

Younger readers may wonder why Ireland does not have any tax on residential property.
But we once had Rates on residential property and the history of their abolition suggests caution about the likelihood of the quick re-introduction of any similar tax.
In 1974 the then Minister for Local Government, Jim Tully, commissioned the ESRI to undertake a study of local authority taxation and expenditure. This was prompted by the growing unpopularity of Rates on domestic residences, which were increasingly perceived as unfair and arbitrary.
The study by myself and John Copeland (whose tragic death occurred just as the Report was being completed) was published in December 1975. We argued that domestic Rates should be retained but would only function as a fair tax if serious resources were devoted to a revaluation of rateable property. We urged that some element of site value rating should be introduced to encourage the development of the derelict sites that were so evident in Dublin and other cities at the time. (The civil servants on the steering committee duly warned us that this would be unconstitutional.)
The study had predictably little impact on policy. The Fianna Fáil 1977 Election Manifesto promised the abolition of domestic Rates and following the party’s electoral triumph they were duly scrapped. (Rates on agricultural land were subsequently declared unconstitutional due their arbitrary incidence.)
A Residential Property Tax (RPT) was introduced in 1983 in response to the fiscal crisis of that time. It was based on self-assessment of the “market value” of houses. Initially most of the revenue it generated came from a few suburbs of Dublin, where it was naturally very unpopular. In much of the rest of the country it was regarded as irrelevant. Interestingly it applied to second homes, but these were few and far between in those days and probably mainly owned by people paying the tax on their primary residences. As the tax rate was increased and the exemption limits on property value and owners’ income lowered, the resultant outcry led to the scrapping of the tax in 1997. (In 1996 the tax rate was 1.5% of the excess of the value of the property over £101,000 )
Receipts from the RPT peaked at €18 million in 1994 – a mere 0.1% of total tax revenue in that year.
A lesson to be learned are that there is no quick and easy way to impose a viable tax on domestic residences. A fair property tax would require considerable investment in defining and measuring the tax base. Its yield is not likely to be significant relative to total tax revenue.

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